According to Zhitong Finance APP, Novo-Nordisk and Eli Lilly and Co, which have seen immense success in the weight loss drug sector, may initiate a massive merger and acquisition frenzy in 2025. According to LSEG data, due to the tremendous success of weight loss drugs, the cash reserves of these two pharmaceutical giants will reach around 80 billion USD by 2028. The challenge for these two companies will be how to make this money work while avoiding overpaying.

Currently, Novo-Nordisk and Eli Lilly have virtually no competitors in the weight loss drug sector. These two pharmaceutical giants seem poised to maintain rapid growth. LSEG's forecast shows that over the next five years, Novo-Nordisk's annual revenue growth rate will be 16%, while Eli Lilly's will be 20%.

The growing cash flow will place immense transaction pressure on these two pharmaceutical giants. They will also need new products to compensate for the funding drain caused by declining sales of weight loss products—Novo-Nordisk's US patent on the key ingredient of Ozempic will expire in 2031, and many companies, including Swiss pharmaceutical giant Roche and UK drugmaker AstraZeneca, are preparing to compete in the weight loss drug market.

These pressures are reflected in stock prices. At the beginning of 2024, the expected PE ratios for Novo-Nordisk and Eli Lilly were 33 times and 52 times, respectively. By the end of November, the expected PE ratios for both companies had dropped to 26 times and 32 times.

Eli Lilly has already taken the lead in trading. In July of this year, the company spent 3.2 billion USD to acquire Morphic, a biotechnology company specializing in the treatment of inflammatory bowel disease. This is likely to put pressure on Novo-Nordisk, forcing it to ramp up its investments, especially considering that a significant portion of its revenue comes from diabetes and obesity treatment drugs, both of which face competitive risks.

One option for Novo-Nordisk is to supplement or even replace GLP-1 products by acquiring promising new drugs, effectively doubling down in the weight loss drug market. One potential target could be Zealand Pharma, which is developing a promising weight loss drug that appears to have fewer side effects than Ozempic or Wegovy.

Another option for Novo-Nordisk A/S is to actively expand its core Business, specifically by growing beyond obesity and diabetes treatment drugs. Ideally, the company would like a rapidly growing Industry that can boost sales without diluting growth, such as autoimmune diseases. One potential target is the Belgian-listed company Argenx (ARGX.US).

However, even doubling down in the familiar weight loss drug field also means taking risks. Roche is an example. The company invested $3 billion in December 2023 to acquire the US private clinical-stage Biotechnology company Carmot Therapeutics, stating that the company could soon launch seven new weight loss drugs. However, clinical trial data indicate that a more promising drug may cause side effects such as nausea and vomiting, which might make it less attractive than existing products. Additionally, entering new fields can be very costly. For instance, at the end of November, Argenx's valuation was more than double Novo-Nordisk A/S's expected PE.

Novo-Nordisk A/S and Eli Lilly and Co are both in the same dilemma, which creates new risks - these two pharmaceutical giants may find themselves competing against each other in any merger or acquisition, increasing the likelihood that the winning bid is overpriced. However, at least the Banks responsible for merger and acquisition activities are unlikely to be 'starving'.